Wisconsin Snowmobile Corp. is considering a switch to level production. Cost eff

Question

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $42,300, but inventory would increase by $470,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 10.0 percent.

Determine the extra cost or savings of switching over to level production. (Input the amount as a positive value.)

How low would interest rates need to fall before level production would be feasible? (Input your answer as a percent rounded to the nearest whole number.)

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $42,300, but inventory would increase by $470,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 10.0 percent.

Explanation / Answer

Interest paid = 470000*10% i.e 47000

Aftertax savings = 42300

Net loss in switching = 47000-43200 i.e 3800

2) Option should not be accepted

3) Interest rate calculation

(470000*X) - 43200 = 0

470000x = 43200

X = 43200/470000 i.e 9.191%

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